Any reasonable portfolio will do fine if expenses and taxes are minimized and the portfolio is not changed when the next trend comes along. IMHO, the PP is pushing the limits of reasonable (25% in three asset classes with some pretty undesirable characteristics), but will probably be fine if HELD FOR DECADES. Better than a more conventional portfolio? I doubt it, but I've been wrong before.

I never actually posted on the old thread, but here are my thoughts, for what they are worth...

I think that 4% might be a bit high. The reason I say that is that two of the asset classes have a long-term expected return near zero. In the 25% Long Treasuries, you are taking more duration risk, but less credit risk, than TBM, so I think overall the expected return should be similar. That leaves the 25% equities. If it's TSM/Total International with no tilting then you have a pretty conservative portfolio. You could of course do the Larry Swedroe approach and have all the equities be SV, ISV, and EM and increase the expected return (and SWR). Tilting sufficiently may get you to a 4% SWR.

I think that the PP is very well designed for capital preservation under almost any eventuality. But I would consider it a quite conservative portfolio, which I think will necessarily be reflected in its expected return.

Yes, I do understand that PRPFX isn't the same as the Permanent Portfolio, but I know where to get data for the former, and not for the latter.

Oddly, I can't find return since inception calculated for me on either the Morningstar or the Permanent Portfolio Family of Funds websites, but Morningstar shows $10,000 invested on 12/31/1982 growing to $63,664 today, call that 27.8 years, and you get an annualized return of 6.885% nominal. However, SWR figures are for an initial percentage then COLAed.

Taking inflation into account, $63,664 today is only worth $29,028.40 in 1983 dollars, so the return is only 3.9% real.

Furthermore, the first 20 years were slow. It grew to $27,808 at year-end 2002 = $15,395 year-1983 dollars = 2.1% real for the first 20 years.

I don't know an automated way to download the growth chart into a spreadsheet, and I don't want to bother typing in all those numbers and just to be told it doesn't mean anything because it isn't really the Permanent Portfolio, but I'll say this much.

If you do all figures in real dollars, start with $10,000, and assume 2% annual real growth for 20 years (lower than PRPFX's average real growth for those years), followed by 8 years of 8% real growth, you get 3.68% real growth for 28 years (less than PRPFX again).

If you try drawing $400 from that every year, you find that the total drops to $4,946.15 at the end of the twentieth year.

8% of $5,000 is $400, and we have almost that much, so from that point on the total shrinks at a very slow, though increasing rate. At the end of year 28, we still have $4,559.95 which seems certain to support $400 withdrawals for quite a few more years.

So the answer seems to be that over its lifetime, PRPFX would have indeed have supported 30 years of 4%-then-COLAed withdrawal rate, with almost have the original real value remaining, i.e. a fairly good margin of safety.

I'm surprised, because I'd have thought there would be an order-of-returns problem caused by the early slow years, but I think it's not severe because the returns of PRPFX, while variable, are smooth

I'd appreciate it if someone would do a reality check on my calculations.

Not disparaging VG advisors @ all but in IIRC it was in 97 I asked what I should do with new incoming funds as a slicer. I was directed to VGPMM.<shrug> I guess I should have started a sliced position for a 10+yr hold.. Sorry to stray OT.

I have known of the Permanent Portfolio fund run by Michael Cuggino for some time. I have seen its returns since 1982.

Has there been a post comparing year by year, the returns of his version of Harry Browne's pure 25/25/25/25 allocation to how the original did or would have hypothetically? I would appreciate any help in finding that information. I think I had it somewhere and have misplaced it.

Thanks.
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Well, I just found this information. But it isn't quite what I am looking for.http://www.harrybrowne.org/PermanentPor ... esults.htm
................................
This is what I remember looking at. I just wish I could juxtapose it to the same for Cuggino's Permanent Portfolio:

nisiprius wrote:Yes, I do understand that PRPFX isn't the same as the Permanent Portfolio, but I know where to get data for the former, and not for the latter.

Oddly, I can't find return since inception calculated for me on either the Morningstar or the Permanent Portfolio Family of Funds websites, but Morningstar shows $10,000 invested on 12/31/1982 growing to $63,664 today, call that 27.8 years, and you get an annualized return of 6.885% nominal. However, SWR figures are for an initial percentage then COLAed.

PRPFX also had higher expense ratios in its early years (50-75 basis points higher than today). That would have obviously been a drag on performance compared to the HB PP (which has VERY low costs).

The whole concept of PRPFX (i.e., an HB PP inspired allocation with an inflation tilt) also basically took an entire generation to overcome its initial performance chasing inflation bias.

"Early in life I noticed that no event is ever correctly reported in a newspaper." |
-George Orwell

If you know the total real return for every year during some period, you can use a Magic Sum formula to calculate the Maximum Withdrawal Rate (MWR). MWR is the initial withdrawal rate that will spend the portfolio down to zero over that period.

Obviously, for a hostorical period, it can the MWR can be calcluated exactly. But since we are talking about the future, the real return sequence is not known. So the ultimate answer is that the sequence of future returns is unknown, so the MWR is unknown.

But just for the sake of argument, let's proceed anyway. To come up with the MWR, say for the next 30 years, you would have to make some kind of forecast of returns. One approach might be to come up with a probability distribution for the annual return for the HBPP and run Monte Carlo simulations.

I have a spreadsheet somewhere that did something like this and calculated MWR. I just looked at it, but it's so complicated and poorly documented that I can't remember how it works!

This approach would need a probability distribution and parameters (like mean annual return and standard deviation if the assumed pdf has two parameters) for the HBPP.

Supposed I assumed returns were normally distributed. Does anybody have a good forecast for the average annual return and standard deviation of HBPP?

Last edited by grayfox on Sun Oct 24, 2010 4:44 am, edited 1 time in total.

Using the expected return of the components back in June, I estimated 1% real return without rebalancing and 2.5% real return with rebalancing if you get a 1.5% rebalancing return which is what Clive suggested. But TheDan's chart indicated only about 0.43% to 0.56% rebalancing return, depending on how wide the rebalancing bands. LBill did a lot of work looking into rebalancing.

LBill wrote:I used Simba's spreadsheet to compare annual rebalancing of the 4 x 25 PP to not rebalancing over all 10-year rolling time periods from 1972-2009. There are 29 overlapping 10-year periods. Not rebalancing produced higher compound annual growth in 17 of the 29 periods, compared to 12 for annual rebalancing. The average 10-year compound growth was 9.03% for not rebalancing and 8.66% for rebalancing. Your expected compound annual growth over 10 year periods is .4% higher without rebalancing. This confirms other studies, which show that the benefits of rebalancing are quite period-specific and are likely not to show up over shorter time periods.

So it appears that the rebalancing return is iffy. If you have patience to wait for 40 years, it is likely to appear.

For now, I'm just gonna say the expected real return is somewhere from 1.5% to 2.5% real over the long term, say 30 or 40 years. In other words, the center of the range of returns is somewhere between 1.5% to 2.5%. Maybe I'll try plugging in 2% mean annual return into my spreadsheet.

What about standard deviation?

LBill wrote:
What does show up over 10-year periods is the effect of rebalancing on the variability of 10-year returns, measured as Standard Deviation (SD). The average SD of 10-year returns with rebalancing is 7.70%, and for not rebalancing it is 9.78%.

So if the 10-YR SD is 7.70%, what would be the annual standard deviation? Isn't there a formula for that or something? s(n)=s*SQRT(n) Or maybe I'm misunderstanding, and 7.70% is the annual SD. I'm lost.

I'm pretty sure the SD of HBPP is less than that of a typical 50/50 portfolio. (Which I think is the key to its success.)

So I plugged in mean=2.0% and SD=7.70% into my spreadsheet. This spreadsheet assumes that returns are normally distributed and every year's return is independent from other years. There is no momentum or mean reversion in the model.

which is for one actual run I just did. What this means is, given the particular sequence of returns for that run, you could have take out 4.34% of the initial value adjusted for inflation each year and the portfolio would deplete in 30 years. For 40-year, it was 3.40% and 100 years 1.54%

Now I don't have a real Monte Carlo simulator. I have to hit Re-Calc every time to get a new run. (I call it the poor man's Monte Carlo simulator. Someday maybe I'll learn how to program a loop in Excel. )

So I did fifty trials and recorded the results for MWR (30-year). Here are the statistics for the 50 trials.

MWR (30-year)
6.83 MAX
4.15 MEAN
2.29 MIN
1.01 SD

So the average 30-year MWR over the 50 runs was 4.15% and it ranged from 2.29 to 6.83. If you got the best sequence of returns you got 6.83%. If you got the worst sequence of returns, you got 2.29%

Under the simplifying assumptions stated above, maybe from the 68-95-99.7 rule, or three-sigma rule, I would be willing to say that there is a 68% chance (+/- 1SD) that the MWR for HBPP over 30-years is between about 3 and 5 percent, and a 95% chance (+/- 2SDs) it is between about 2 and 6 percent.

BTW, what would be the standard error for n=50?

Last edited by grayfox on Mon Oct 25, 2010 2:17 am, edited 1 time in total.

Here is one more thing I looked at. I wanted to see how this would compare to a 50/50 stock/bond portfolio using more or less the same assumptions. I assumed mean real return of stocks will be 5% and bonds 2%. A 50/50 would have 3.5% mean return. I set SD=11% based this chart from Paul Boyer's madmoneymachine. Portfolio SBCP is 50/50 so I used that portfolio's standard deviation which looks like about 11%.

So for N=50 trials, the MWR over 30 years had a mean of 5.13% and the range was from 2.25 to 9.39 percent. Call it 2 to 9 percent. Standard deviation statistic is bigger that of the HBPP.

Now from a chart on bobsfinancialwebsite, I know historically that a 50/50 portfolio had MWR ranging from 4 to 8 percent, compared to about 2 to 9 for this model with the simple assumptions. I'm thinking that the assumption of independent returns every year is to simplistic and makes the range wider then it is likely to be. For instance, a big down year is probably more likely to be followed by a big up year, like 2009 followed 2008. So maybe a better model would incorporate mean reversion. But that is beyond the scope of this project.

The same may be true for the MWR range of HBPP. This simple model probably overstates the likely range, but probably less so than for the 50/50 because HBPP doesn't drop 25% in one year like the 50/50. So instead of 2 to 6 percent range, it's probably a little tighter than that.

Permanent Portfolio has Less Uncertainty
I wouldn't put too much faith in any of these absolute numbers. They are just based on guestimates and my simple model. If anyone has different forecasts, I can plug them into the spreadsheet. All the spreadsheet does is come up with a random sequence of returns and then calculates the Maximum Withdrawal Rate using the Magic Sum formula. Plus it does all the bookeeping to keep track of how much of the balance is remaining. It's really nothing fancy.

The key takeway is that the 50/50, with higher expected return but higher volatility, has greater uncertainty in what the MWR will be. It could be really great or really awful. On average, the MWR is probably a little higher for the 50/50 than for the HBPP.
The HBPP's lower volatility has less uncertainty in Maximum Withdrawal Rate.

Last edited by grayfox on Mon Oct 25, 2010 3:47 am, edited 4 times in total.

EmergDoc wrote:IMHO, the PP is pushing the limits of reasonable (25% in three asset classes with some pretty undesirable characteristics)

Hi Emergdoc!

Undesirable characteristics... if the asset classes are viewed separately. But their combined behaviour actually has very desirable characteristics. (for a portfolio focused on wealth preservation).

EmergDoc wrote:but will probably be fine if HELD FOR DECADES.

Checking historical results from 1972 to 2010, I get the opposite impression: the PP has provided extreme stability. So far no "lost decade" for PP holders.

I'm unaware of any reason why a PP would need a longer investment horizon than other portfolios used by Bogleheads - unless you're referring to holding one of the four asset classes in isolation (which Harry Browne would certainly not have recommended), as opposed to holding the full PP.

There seems to be an under appreciation in some circles as to the benefit of the PP. It allows you to have about the same expected return as the more stock-heavy portfolios but with a MUCH smaller draw down. (At least this is true for 38 years of back-testing). It's that simple.

The expected return can be enhanced if you get really aggressive with the stock portion, but that may be too much for some.

Call_Me_Op wrote:There seems to be an under appreciation in some circles as to the benefit of the PP.

I find myself spending a lot of energy simply explaining to people that the PP does, in fact, work. Many people seem unprepared to acknowledge that something so counterintuitive could actually work, much less provide safety and stability. I understand the resistance, however. I felt the same way the first time I heard about it.

What I don't understand are people who seem reluctant to give the PP credit for being a legitimate, safe and well designed approach to capital preservation after being presented with well-reasoned and supported arguments for its effectiveness.

It reminds me a bit of the clerics who refused to look through Galileo's telescope.

"Early in life I noticed that no event is ever correctly reported in a newspaper." |
-George Orwell

This is so obvious I'm surprised that I can't remember seeing it stated. Due to the obvious statistical inadequacy of drawing inferences about 30-year withdrawal periods from only 84 years of data...

...historical observation can give you absolute certainty that some specified withdrawal rate X% is UNsafe, but can never give you more than weak evidence that any specified withdrawal rate is safe.

Yep. The data that people rely on for many investing assumptions is from a remarkably tiny sample size. I like to use past data to disprove ideas. I don't like to assume it can prove anything going forward. It may prove to be useful, but it doesn't mean it will be useful on a particular investor's time table.

The one thing that I liked about the Permanent Portfolio is in my research it held certain assets that could provide some protection in severe market conditions and growth in good market conditions. But more importantly, the asset allocation I felt gave me more options to deal with extraordinary events that my stock/bond allocation didn't do going forward.

So is it going to be "better?" Well everyone thinks their horse is the one that's going to win the race. Yet, I don't want to win the race. I just want to finish without having my horse break its leg and need to be put down for good.

However I think the Permanent Portfolio is not a bad option for people that are looking for moderate growth and capital protection without wild swings in value. The other thing that struck me about it is it hasn't had an extended period yet of negative real returns. Meaning that over any 10 year period going back at least the 40 years of good data we have it has usually had a real return in the +3-5% range. I didn't see this in some of the other asset allocation strategies I researched.

But I also admit that if the stock market is humming the portfolio is going to lag. However this is the price you pay for a more conservative approach that is trying to have acceptable returns in all markets.

Now is 25% in each asset too much or too little? I think it works out fine if you are rebalancing as you are supposed to. The 25% allocations act as a firewall in the portfolio. Even if one of the assets were to do extremely bad one year you will not be devastated and the damage is likely to be contained. Not just this, but the volatility of the assets allows for some interesting rebalancing opportunities.

The volatility of the assets by themselves is well known. Gold is certainly volatile. But who is to argue that stocks are not as well? But together I believe that data shows the mix to be remarkably un-volatile. The portfolio has been through good markets and incredibly bad ones but has still managed to plod along with very little in the way of losses and respectable returns. I don't think the volatility in the portfolio is any worse than a typical stock/bond allocation alone has experienced.

Finally, I was talking with MediumTex the other day and he brings up a good point. That if someone wants to hold volatile assets like stocks, LT bonds and gold that the Permanent Portfolio is probably the safest way to do so. This is primarily because the strategy was designed specifically to make use of the volatility to counter losses in each. This is a far different approach from other gold bug portfolios for instance whose idea of diversification is to own gold, silver and gold miners. Or a stock only portfolio that is trying to diversify by splitting among different stock sectors. In terms of risk I'd far rather be in the Permanent Portfolio than in concentrated plays on any one particular asset class.

IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me. |
|
Please refer to archive.is or archive.org for old links in my post.

The mods said in the last post where they locked the original PP thread that it was locked for political discussions.

The problem with the PP is that its impossible to discuss without mentioning something political. The fact is that Harry Browne was a libertarian and designed the portfolio as a hedge against government failure.

If you believe your government can never fail under any circumstances, then the PP doesnt make too much sense and loses a lot of its appeal.

If you believe theres any chance your government may fail, then we cant discuss that on bogleheads.

I think craigs crawling road forum on the PP might be the best place to discuss this.

Clive wrote:The following assumes you'd run a PP, reviewing yearly and rebalanced whenever any one of the four components had declined below 15% weighting, or risen above 35% weighting, rebalancing all four back to 25% weightings when so.

Excludes costs/taxes.

An income of 5% of the total fund value was withdrawn at the start of each year.

The 5% withdrawal rate was identified simply by visually fitting the remainder of fund growth after income had been withdrawn compared to inflation. I added a trendline to the remainder (after income) capital growth line to help with that visualisation.

Thanks for that spreadsheet. So it looks like 5% withdrawal from 1972-2008 would not have depleted the portfolio, and paces inflation.

Since I now have the series for inflation and the series of returns from 1972 to 2008, I can calculate the actual historical Maximum Withdrawal Rate** (MWR) for the HBPP over that period using the Magic Sum formula. Here are the results:

This compares favorably with a 50/50 portfolio which in bobs financial website shows a historical MWR ranging from 4% to 8% going back to periods starting in 1926. He shows 1972-2001 MWR for a 50/50 was a little under 5%. (See the first chart on his page.)

Of course the answer we seek is what will be MWR(2010-2040), or whatever future withdrawal period you contemplate. My estimate is somewhere from 2 to 6 percent. This is lower than 1972-2008, mostly because I think real return expectations in 2010 are lower. Interest rates and dividend yields today are only half what they were in 1972. It's hard to see a great return when you start from high prices.

----------
**Maximum Withdrawal Rate is the percent of the starting balance that you could withdraw that would just deplete the portfolio to zero. If you take out less than MWR you would end up with a balance at the end. If you take out more than MWR, you would run out before the end.

The problem with the PP is that its impossible to discuss without mentioning something political. The fact is that Harry Browne was a libertarian and designed the portfolio as a hedge against government failure.

If you believe your government can never fail under any circumstances, then the PP doesnt make too much sense and loses a lot of its appeal.

If you believe theres any chance your government may fail, then we cant discuss that on bogleheads.

You do realize that the PP requires an investor to lend 50% of the assets to the United States Government. 25% for more than 20 years.

The problem with the PP is that its impossible to discuss without mentioning something political. The fact is that Harry Browne was a libertarian and designed the portfolio as a hedge against government failure.

If you believe your government can never fail under any circumstances, then the PP doesnt make too much sense and loses a lot of its appeal.

If you believe theres any chance your government may fail, then we cant discuss that on bogleheads.

You do realize that the PP requires an investor to lend 50% of the assets to the United States Government. 25% for more than 20 years.

I think that a more nuanced approach to describing these dimensions of the PP is to say that the government bond market provides a non-correlated asset to the other PP components that has provided the volatility that the PP needs to function as advertised.

In many ways the PP is what you might call politically/economically agnostic. It expresses no belief or preference about what might or should happen in the future--it just protects you against whatever may come along. This is, to me, a very different perspective than building a portfolio around the idea that one future scenario is inevitable (as some goldbugs and stockbugs are wont to do).

"Early in life I noticed that no event is ever correctly reported in a newspaper." |
-George Orwell

I know this particular issue has been discussed ad nauseum and generally dismissed (as a bad idea), but I am still entertaining replacing a portion of the gold allocation with TIPS. In addition, I may reduce the duration of the government bonds. In terms of backtesting, this results in a slightly lower return but much lower volatility - and makes me feel more comfortable.

Reducing the gold allocation does take some of the teeth out of the inflation protection, but reducing duration on the bond side reduces the need for those teeth.

I would add something. I've been re-reading Bernstein's Four Pillars book. He points out that if you own an SP500 index fund, are you going to look in the paper and get bothered when you discover that a few of the stocks in the fund are down 80%? Of course not, they are simply components of the larger "AA" of the fund.

You are bothered by volatility of the *components* of the PP. The PP itself is not very volatile. Craig keeps trying over and over again to make this point.

It goes beyond that. Gold and TIPS respond to inflation in different ways. The main downside (conpiracy theories aside) to diversifying the inflation quadrant with TIPS is it may reduce the return slightly. Then again, it may not in practice (depending upon how you buy-into the portfolio, etc.). It is actually an additional degree of diversification, because in many ways TIPS are a purer inflation hedge. I'm talking some gold and some TIPS - not one OR the other.

So what I am creating should not be called a Permanent Portolio but rather a Personal Portfolio. I prefer that anyway.

There is a benefit. TIPS have a backstop in price. Assuming you buy them at auction and hold to maturity, you are guaranteed to get your initial investment back. Gold can lag inflation for decades. I'm not knocking gold at all - just pointing out that there is a case that can be made for some TIPS as a component of one's inflation hedging.

Also, I don't see why the cash portion MUST be 100% in government debt. In fact, I would intend to keep some of my cash allocation in banks as part of a broader strategy.

I see your point, though, that 75% in government debt may be relying too much on the solvency of the government. Keeping some of the money in (highly rated) banks and credit unions would reduce that risk, and also reduce other risks.

Call_Me_Op wrote:
Also, I don't see why the cash portion MUST be 100% in government debt. In fact, I would intend to keep some of my cash allocation in banks as part of a broader strategy.

Here is why the thread won't work here. My answer will get deleted by a moderator for being political.

The answer to this question is that Harry Browne said the cash portion must be in 100% treasury bills because the FDIC is insolvent and holds 1% of the money it claims to be able to insure. So in the case of a run on banks, you will lose all your cash. However the US Government can always repay its debts by raising taxes or printing money.

Thats what Harry Browne said word for word, and its a political statement (although entirely true) which is why this thread doesnt work here.

Call_Me_Op wrote:There is a benefit. TIPS have a backstop in price. Assuming you buy them at auction and hold to maturity, you are guaranteed to get your initial investment back. Gold can lag inflation for decades. I'm not knocking gold at all - just pointing out that there is a case that can be made for some TIPS as a component of one's inflation hedging.

TIPS also have a ceiling in price. In 2008 the yields went negative on the intermediate term TIPS. This is something I had mentioned in the distant past but it was interesting to see it actually happen as people thought inflation was coming. I am not quite sure how TIPS will really do under a bad inflation.

I suspect they will redline at some number that will allow the TIPS portion alone to tread water but the rest of the portfolio will lose real purchasing power. The TIPS won't have the pop of the gold allocation in my opinion.

Also, I don't see why the cash portion MUST be 100% in government debt. In fact, I would intend to keep some of my cash allocation in banks as part of a broader strategy.

I see your point, though, that 75% in government debt may be relying too much on the solvency of the government. Keeping some of the money in (highly rated) banks and credit unions would reduce that risk, and also reduce other risks.

The reason for 100% govt. debt for your cash and bonds is to avoid the most credit risk you possibly can. Barring these extreme events like a Treasury default, the Treasury is going to be the last to fall in the bond market if you think about it. Corporations cannot print money nor tax people. States can tax people but not print money. But in 2008 you can see that credit risk is very real and people valued Treasury bonds above all other fixed income options. The price appreciation reflected this.

If there is bad inflation in the dollar then Treasury interest rates will rise. If LT bonds hit 10% for instance then that would mean corporate bonds will have to pay much more to compensate investors for the risk. So holding corporate bonds means they will be much more volatile than Treasury bonds under bad inflation. Muni bonds will be in a similar situation.

If you want to speculate for more growth in the portfolio I would recommend setting up a variable portfolio and holding more in stocks. Stocks are a much more efficient way to capture market growth than speculating on lower quality bonds.

Last edited by craigr on Mon Oct 25, 2010 11:48 am, edited 1 time in total.

IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me. |
|
Please refer to archive.is or archive.org for old links in my post.

I hope they will make an exception in your case, as the information was essential in terms of explaining your point. And it's a good point. One has to decide how much weight he or she wants to give to the possibility that the US may default on its debt, or that the Treasury would let the FDIC go bankrupt. The probability of either event is very small, but not zero.

etienne1 wrote:I have known of the Permanent Portfolio fund run by Michael Cuggino for some time. I have seen its returns since 1982.

Has there been a post comparing year by year, the returns of his version of Harry Browne's pure 25/25/25/25 allocation to how the original did or would have hypothetically? I would appreciate any help in finding that information. I think I had it somewhere and have misplaced it.

Thanks.
.........................
Well, I just found this information. But it isn't quite what I am looking for.http://www.harrybrowne.org/PermanentPor ... esults.htm
................................
This is what I remember looking at. I just wish I could juxtapose it to the same for Cuggino's Permanent Portfolio:

Call_Me_Op wrote:There is a benefit. TIPS have a backstop in price. Assuming you buy them at auction and hold to maturity, you are guaranteed to get your initial investment back. Gold can lag inflation for decades. I'm not knocking gold at all - just pointing out that there is a case that can be made for some TIPS as a component of one's inflation hedging.

Also, I don't see why the cash portion MUST be 100% in government debt. In fact, I would intend to keep some of my cash allocation in banks as part of a broader strategy.

I see your point, though, that 75% in government debt may be relying too much on the solvency of the government. Keeping some of the money in (highly rated) banks and credit unions would reduce that risk, and also reduce other risks.

Let me preface my comments with my agreement with MT that you should do what you are most comfortable with. A couple of things to consider:

Will TIPS rise sufficiently to offset the potential losses in the balance of the portfolio during a high inflation period? If so, what is the tax ramification if not in tax deferred space? Also, craig's oft mentioned comparison of buying fire insurance from the arsonist should be considered.

If the UST is not solvent, I am not sure that there are any banks that could survive a run on deposits.

The problem with the PP is that its impossible to discuss without mentioning something political. The fact is that Harry Browne was a libertarian and designed the portfolio as a hedge against government failure.

If you believe your government can never fail under any circumstances, then the PP doesnt make too much sense and loses a lot of its appeal.

If you believe theres any chance your government may fail, then we cant discuss that on bogleheads.

You do realize that the PP requires an investor to lend 50% of the assets to the United States Government. 25% for more than 20 years.

I know, this is one of the things that makes a person new to PP feel uneasy. But just the fact that Harry Browne, being a prominent libertarian, recommended Treasuries and US dollar, means there must be a solid reason to do that.

I hope they will make an exception in your case, as the information was essential in terms of explaining your point.

Speaking as the site admin - We'll let it stand. Although note that craigr was able to respond to the same point in a way that does not pose any difficulties with the forum's policies.

If I may rework Febreze's earlier recommendation... This is a good place to discuss the investing aspects of the Permanent Portfolio. There's a lot of activity here, so you'll get a lot of feedback: including responses from those skeptical of the idea which IMO is always a valuable check before plunging into a novel strategy. But if you want to discuss the politics or philosophy that underlie a good deal of Harry Browne's reasoning or have fully bought into the philosophy and are looking to fine tune your holdings or for related information, then you will be much better off doing so on craigr's Permanent Portfolio Discussion Forum.

Febreze wrote:The mods said in the last post where they locked the original PP thread that it was locked for political discussions.

The problem with the PP is that its impossible to discuss without mentioning something political. The fact is that Harry Browne was a libertarian and designed the portfolio as a hedge against government failure.

If you believe your government can never fail under any circumstances, then the PP doesnt make too much sense and loses a lot of its appeal.

If you believe theres any chance your government may fail, then we cant discuss that on bogleheads.

I think craigs crawling road forum on the PP might be the best place to discuss this.

I don't think it is all that political, as far as the above goes. Governments fail all the time. Governments repudiate debt all the time. There is no national government in place today that hasn't replaced the one before it. Understanding it has nothing to do with one's political sensibilities, libertarian or otherwise.

By that standard we shouldn't be able to discuss any government security. What about munis? Some of them default. Verboten to discuss the investing aspects of that? No editorial/political comments, I get that.

Just my thoughts. I never thought the other thread was too bad, but it's a dead horse now.

Of course the answer we seek is what will be MWR(2010-2040), or whatever future withdrawal period you contemplate. My estimate is somewhere from 2 to 6 percent. This is lower than 1972-2008, mostly because I think real return expectations in 2010 are lower. Interest rates and dividend yields today are only half what they were in 1972. It's hard to see a great return when you start from high prices.

Thnaks, but 2 to 6% is a wide range.
What could be a shorter range for someone looking for a Sustainable Withdrawal Rate (to keep capital preservation as much as possible) with a time horizon of about 35 years?

Pres wrote:
Undesirable characteristics... if the asset classes are viewed separately. But their combined behaviour actually has very desirable characteristics. (for a portfolio focused on wealth preservation).

I'm unaware of any reason why a PP would need a longer investment horizon than other portfolios used by Bogleheads - unless you're referring to holding one of the four asset classes in isolation (which Harry Browne would certainly not have recommended), as opposed to holding the full PP.

Ideally, a portfolio is made of various elements with low correlation but each with a high expected return. The more low expected return assets you add, the crappier the portfolio. Imagine, if you will, a portfolio made of gold (zero expected real return), cash (0-0.5% expected real return), commodity funds (0-0.5% expected real return), and non-rent producing property (0-1% expected real return.) The correlation is fantastically low, but is the portfolio going to provide sufficient growth to get you to your goals? Seems unlikely, even with extreme volatility and rebalancing bonuses.

The reason you need a longer investment horizon for the PP is that it relies on events that seem to have very long cycles, such as falling interest rates for the long treasuries (let's see, that's happened once since WWII) and run ups in gold (let's see, what, twice in 50 years) etc. Stocks cycle, but much more quickly. It seems particularly remarkable that we've now hit a 10 year period where they haven't earned much. That happens all the time for gold.

But you made my point for me with this statement:

for a portfolio focused on wealth preservation

that isn't my focus, nor the focus of most of my peers. In fact, I submit that a relatively small percentage of investors should be focused on that as their primary goal. Growth is a pretty important characteristic of any portfolio I'll be considering for a long time.

that isn't my focus, nor the focus of most of my peers. In fact, I submit that a relatively small percentage of investors should be focused on that as their primary goal. Growth is a pretty important characteristic of any portfolio I'll be considering for a long time.

Hi EmergDoc,

The PP boasts a CAGR of about 10% from 1972-2009. I wouldn't consider that something that merely preserves wealth. That's a respectable growth rate. And is does this with a remarkably small maximum draw-down. It's this combination of reasonable growth and low risk that I find intriguing if not compelling.

Admittedly, we are at different stages in our investing careers.

Last edited by Call_Me_Op on Mon Oct 25, 2010 7:13 pm, edited 1 time in total.

EmergDoc wrote:that isn't my focus, nor the focus of most of my peers. In fact, I submit that a relatively small percentage of investors should be focused on that as their primary goal. Growth is a pretty important characteristic of any portfolio I'll be considering for a long time.

But the portfolio has had growth. Between 9-10% CAGR the past 30+ years.

However I'd also quibble that wealth preservation should be a consideration of investors. The primary wealth generator for an individual is their career and the money they save from it. It is true that compounding can build wealth, but the years of earning a person has are not replaceable. So investors need growth, but also need to have protections in place against sudden and severe losses (or even protracted losses).

A large drop in portfolio value can represent a decade or more worth of savings. That time can't be recouped and markets may not recover when you need them to. So wealth preservation is definitely a component in case things don't go according to plan.

Lastly, I've seen investors badly burned by reaching for growth when a more conservative investment plan would have worked more profitably.

Last edited by craigr on Mon Oct 25, 2010 7:18 pm, edited 1 time in total.

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The reason you need a longer investment horizon for the PP is that it relies on events that seem to have very long cycles, such as falling interest rates for the long treasuries (let's see, that's happened once since WWII) and run ups in gold (let's see, what, twice in 50 years) etc. Stocks cycle, but much more quickly. It seems particularly remarkable that we've now hit a 10 year period where they haven't earned much. That happens all the time for gold.

There is nothing remarkable about a 10 year period for stocks where they don't earn much. 1966 - 1982 is not ancient history.

that isn't my focus, nor the focus of most of my peers. In fact, I submit that a relatively small percentage of investors should be focused on that as their primary goal. Growth is a pretty important characteristic of any portfolio I'll be considering for a long time.

This is an issue of semantics. The real questions have to do with the results. HB designed the portfolio with the intent that it should avoid large drawdowns while still providing real growth. It then accomplished that mandate so well it equalled or outperformed conventional "growth" portfolios—precisely because it avoided the staggering fat tail losses in any given period, (while sacrificing maximal upside gains. Similar gains—with a much smoother ride—is a tradeoff many investors would accept, as most investors are risk averse (though this can be accomplished with other non-PP strategies too).

Those big losses that test investor resolve produce all sorts of capitulations—from allocation changes that lock in losses, to outright bailing, which locks in losses. Avoiding big losses helps investor discipline and resolve, which are essential to portfolio growth. What the future holds for any strategy is unknown but the information provided by the past (risk premia, correlations, etc.) informs all strategies and should not be utterly disregarded either.

In fact (speaking of growth), if you get aggressive with the stock portion of the PP, you can approach a back-tested CAGR (38 years) of 11%. That would be achievable with 12.5% allocation in SCV and 12.5% allocation in EM. How would you guys feel having your equity exposure so narrowly focused and in such aggressive categories?

Call_Me_Op wrote:In fact (speaking of growth), if you get aggressive with the stock portion of the PP, you can approach a back-tested CAGR (38 years) of 11%. That would be achievable with 12.5% allocation in SCV and 12.5% allocation in EM. How would you guys feel having your equity exposure so narrowly focused and in such aggressive categories?

Larry Swedroe actually does something similar with his personal portfolio--about 30% in really aggressive equities (SV, ISV, EMV) and a lot of very safe bonds. Certainly not for everybody, but that sort of approach has a lot to recommend it. It turns out that SV and EM really didn't do that much worse than any other kind of equities in 2008.

Pres wrote:
Undesirable characteristics... if the asset classes are viewed separately. But their combined behaviour actually has very desirable characteristics. (for a portfolio focused on wealth preservation).

I'm unaware of any reason why a PP would need a longer investment horizon than other portfolios used by Bogleheads - unless you're referring to holding one of the four asset classes in isolation (which Harry Browne would certainly not have recommended), as opposed to holding the full PP.

Ideally, a portfolio is made of various elements with low correlation but each with a high expected return. The more low expected return assets you add, the crappier the portfolio. Imagine, if you will, a portfolio made of gold (zero expected real return), cash (0-0.5% expected real return), commodity funds (0-0.5% expected real return), and non-rent producing property (0-1% expected real return.) The correlation is fantastically low, but is the portfolio going to provide sufficient growth to get you to your goals? Seems unlikely, even with extreme volatility and rebalancing bonuses.

The reason you need a longer investment horizon for the PP is that it relies on events that seem to have very long cycles, such as falling interest rates for the long treasuries (let's see, that's happened once since WWII) and run ups in gold (let's see, what, twice in 50 years) etc. Stocks cycle, but much more quickly. It seems particularly remarkable that we've now hit a 10 year period where they haven't earned much. That happens all the time for gold.

But you made my point for me with this statement:

for a portfolio focused on wealth preservation

that isn't my focus, nor the focus of most of my peers. In fact, I submit that a relatively small percentage of investors should be focused on that as their primary goal. Growth is a pretty important characteristic of any portfolio I'll be considering for a long time.

Not sure what the percentages are of investors focused on "growth" versus those focused on "preservation." My sense is that most of the PP advocates expect some growth over the inflation rate (the PP has delivered this historically) but are unwilling to take on the risk associated with those portfolios that have higher expected returns. As an aside, using Simba's back testing model (72-09) would confirm that the PP was in the same CAGR ballpark as a TSM portfolio but with much lower SD. That is not to say it will repeat but it is to say we just don't know when, and to what degree, the higher expected return will appear.

Lastly, you mentioned that a portfolio must have sufficient "growth" to get you to your goals. Many of us who use the PP also take to heart Harry Browne's 16 golden rules of financial safety. Rule #1 is that your career provides your wealth (not your investments) so your investment plan should be oriented toward preserving what you have. I am not suggesting your "growth" goal is wrong and the "preservation" plan is correct. Different goals almost certainly require different pathways.